HMRC have released Brief 10 (2022) setting out their change in position in determining whether or not an activity is a business activity for VAT purposes and, therefore, whether VAT might need to be applied to the income. At the same time as releasing the Brief, HMRC have also comprehensively updated their manuals to reflect their view on business activities.
Up until now HMRC have applied a 6-point “Business Test” as set out in the Lord Fisher case from 1981. They have now stated that the six questions will be replaced by a 2-stage test to examine whether there is a supply for consideration, and if there is sufficient link between the income received and the supply given.
The 2-stage test is:
Stage 1: The activity results in a supply of goods or services for consideration
Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration)
The key here is whether there is a sufficiently close link between the supplies made and the payments received.
These two stages omit the questions relating to the continuity and earnestness of the activity and most importantly, there is no longer any reference to a profit motive.
The change will most affect charities who provide services at below cost that have previously been considered non-business and other organisations who carry out non-business activities. These supplies are likely to now be considered a business activity to which VAT may apply if relevant. This may make it more important to consider if the income is covered by any other provision that might exempt it from VAT.
Any clients concerned that the change may affect their income streams can contact Naomi Quant.
